But the contraction in manufacturing seems to run counter to the employment part of the index, which showed a growth in hiring. The index for employment slipped to 51.6% in August, from 52% the prior month, but still showed expansion.

"Almost every manufacturer I talk to says they're having trouble hiring workers, so they're trying to fill the gap," said Moutray.

Robert Kavcic, analyst for BMO Capital Markets Economics, said the employment index is at its lowest level since November 2009 "and hints at more subdued growth in manufacturing jobs ahead of Friday's much-anticipated payrolls report."

The stagnant manufacturing industry isn't just a U.S. problem. The ISM report follows recent data on Chinese manufacturing that showed weakness in Chinese factories.

On Monday, a closely followed report from the bank HSBC said that export orders for Chinese factories slid at their sharpest rate since March 2009. On Saturday, the Chinese government said its official manufacturing index fell to 49.2 in August, from 50.1 the prior month.